ii view: caterer Compass points to improved profit

by Keith Bowman from interactive investor |

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Second-quarter trading update to 31 March

  • Profit margin of around 4%, up from 2.7% in the previous first quarter
  • Organic revenue expected to be down 28%

ii round-up:

Canteen provider Compass Group (LSE:CPG) today flagged an improvement in quarterly profitability despite still subdued volumes during the pandemic. 

Second-quarter profit margin is expected to come in at around 4% compared to 2.7% in the first quarter. That's ahead of analysts’ forecasts of nearer to 3.5% and up from the 2.9% achieved over its last pandemic hit full financial year to the end of September. 

Compass shares rose by more than 2% in early UK trading, leaving them up by more than 40% since late October and just prior to the announcement of vaccine development success. Shares for French catering rival Sodexo (EURONEXT:SW) are up by a similar amount.

Compass, which employs over half a million people, has been busy renegotiating customer contracts and slashing costs. 

Organic revenue for this latest quarter fell by 28% year-over-year, better than the near 34% fall suffered in the prior first quarter. Compass operates across sectors including business and industry, healthcare, education and sports and leisure.

Second-quarter revenues for its canteen’s serving education establishments fell by 29% year-over-year compared to 37% in the previous first quarter. Most UK schools and colleges have recently returned to onsite learning. Sports and leisure remains its biggest hit sector, with organic revenue down 69% in Q2. 

Recent currency movements are expected to hit half-year sales by £456 million and cause a £38 million drag on operating profit. Over half of the group’s sales in its last financial year came from North America. 

Accompanying management comments pointed to uncertainty in the pace of volume recovery given the pandemic, although its pipeline of new business and client retention remains strong. The board continues to target a profit margin above 7% before returning to pre Covid-19 volumes. 

First-half results are scheduled for 12 May.

ii view:

Compass is arguably both defensive and diverse. It serves over five billion meals per year across more than 40 countries. Business and industry customers account for its biggest customer segment, followed by healthcare and then education. In more normal times, this mix of economically geared and defensive customer areas works well. 

From March last year, the closure of many of its canteens because of the pandemic left it, like so many other companies, looking to conserve cash. It moved to raise £2 billion to strengthen its balance sheet and reduce debt. Management also halted the dividend payment, bringing an enviable record of 16 consecutive years of payment increases to an end. 

For investors, group action to cut costs and renegotiate customer contracts is clearly having a positive impact. Available liquidity of around £5 billion as of its last full-year results offers some reassurance, as does its underlining of significant structural market opportunity globally. But uncertainty over the trajectory of the pandemic and a recovery in canteen visits and volumes remains high and the dividend payment remains suspended. For now, with the share price sat around analysts’ current fair value estimate of £14.48, there appears no rush to take action.  

Positives: 

  • Diversity of both customer and geographical location
  • Strengthened balance sheet

Negatives:

  • Food costs can be volatile
  • Covid-19 could result in more staff permanently working from home 

The average rating of stock market analysts:

Strong hold

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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